Champagne And Crude In The Other Iraq

Foreign endorsements are coming thick and fast in the city of Arbil in Iraqi Kurdistan--Genel Energy , the Kurdish region's largest oil producer, was snapped up last year by former BP chief executive Tony Hayward and financier Nat Rothschild

Dusty, windswept and interspersed with military checkpoints, the city of Arbil in Iraqi Kurdistan is the Middle East’s unlikely latest investment hotspot. Only 400 kilometres and a border of disputed territories separate this semi-autonomous oasis of calm from the risk of suicide bombings and political instability that troubles Baghdad. Oil majors are mobilising to tap the estimated 40 billion barrels of crude reserves in the north, positioning Kurdistan for a major economic boom.

Foreign endorsements are coming thick and fast. Genel Energy , the Kurdish region’s largest oil producer, was snapped up last year by former BP chief executive Tony Hayward and financier Nat Rothschild. Exxon Mobil has signed a deal with the Kurdistan Regional Government. France’s Total has confirmed it is also weighing an entrance, in defiance of the central Iraq government, which receives all oil export revenues before sharing them out and deems illegal the contracts signed by the KRG.

Kurdistan is currently producing oil at just a fraction of its potential. But it already boasts of an 8 percent GDP growth rate. Wealth per capita is more than twice that of Egypt. Foreign financiers fill the bars of the city’s newest five-star hotels. Many still only travel beyond their luxury confines in armed-security conveys. Arbil’s less fearful growing clan of millionaires, meanwhile, host lavish parties, importing chefs, magnums of champagne, the finest seafood and mountains of strawberries. Like Arbil’s ambitions, the aptly titled “Dream City” residential area is vibrant — but only half built.

A model economy

Unusually for an oil-rich Middle Eastern economy, Kurdistan is embracing the private sector. Investors don’t need a local partner to start a business. They benefit from tax breaks and can freely transfer profits abroad. The government is a minority partner in oil projects, and its contracts are available to view online. At least when the internet works. The deals struck by the KRG offer oil majors long-term value of around $5 or $6 per barrel, compared to estimates of around $1 in Baghdad.

But it isn’t all an easy ride. Kurdistan has two international airports within a three hour drive, but it remains a cash economy without the tools of a sovereign state, like the ability to print money or issue banking licenses. Oil companies, predictably, do their business in dollars.

The command economy of the Baath regime has long gone in Kurdistan. But the KRG still can’t forge public-private partnerships to develop its industries because, under the federal system, it depends on Baghdad for its funding. Power cuts often plunge meetings into darkness, and it’s hard to tell whether the dimming of lights in the hotel bar is meant for aesthetic effect, or not.

Turkey holds the key

The KRG publicly supports a unified federal Iraq, but Kurdistan might be richer as an independent country. In the current system, if the region’s export capacity grows and political problems keep holding things back in the South, the KRG could become a net contributor to the Iraq budget.

In a perfect world, Kurdistan would export its oil directly to energy-hungry Turkey and avoid the bureaucratic black hole of Baghdad. Iraq would just be one of the troubled neighbours on its periphery — alongside Syria and Iran. Currently the KRG and Baghdad can’t agree on oil revenue sharing, resulting in delayed and irregular payment. Until the dispute is resolved, the KRG is placating its oil producers by effectively letting them profit more than they would otherwise for what they sell domestically.

Turkey doesn’t want to encourage its own restive Kurdish population but is heavily invested in Iraqi Kurdistan’s success. Relations between Ankara and Baghdad have weakened of late. Turkish Prime Minister Tayip Erdogan fears that his Iraqi counterpart Nuri al-Maliki, under the influence of Iran, might steer the rest of the country into sectarian conflict. Turkish national colours can be seen on construction sites in Arbil, and Turkish banks finance many of the projects.

The oil majors eyeing up small and mid-sized producers with operations in the North — like Gulf Keystone Petroleum and Norway’s DNO — bet that Turkey could eventually agree to buy Kurdish oil directly if Baghdad fails to agree on a revenue-sharing law soon. Due for completion in 2013, Genel Energy’s planned pipeline running from its Taq Taq field surrounded by snow-capped mountains up to the main Iraqi-controlled one could easily be extended by a few kilometres to reach the border.

Baghdad breaking point

Political pressures are growing but, for now, in Kurdistan, optimism rules. The Kurdish diaspora is returning to be part of the growth story. Arbil’s millionaires want to become billionaires. That can only happen if more of Kurdistan’s oil explorers turn into producers that can export their oil. Production capacity is already ramping up and is expected to reach 1 million barrels per day by 2018. The impasse requires a solution. With the stakes so high for all sides, investors wouldn’t look foolish to bet on an amicable and lucrative one.